Businesses have many options when it comes to forming legal entities to best protect and serve their interests. For most industries, the type of corporate structure selected is usually based on optimizing the best approach regarding tax benefits and administrative simplicity. However, when it comes to the emerging crypto space, founders and teams often find themselves in unchartered territory due to a variety of factors.
When a new crypto coin is released through an ICO (Initial Coin Offering), there is a gray area that exists with respect to regulations. During this period, the coin issuer is selling digital coins to buyers. After the ICO, the coin is in circulation among coin holders who can buy and sell it among themselves without the involvement of the original coin issuer.
While government agencies differ with each other when it comes to determining if a particular crypto coin should be regulated by securities or banking regulations, they all tend to join forces in opposition if they are cut out of the ICO process (despite the cumbersome, intrusive and restrictive regulatory compliance process). However, after the ICO has been concluded and a coin is widely circulating, then there is no one party that they can target their regulatory wrath upon.
Bitcoin and Ether are perfect examples of this. Regulators have agreed that since both of these digital currencies are widely traded with no central authority involved, they are not subject to any regulatory restrictions. Essentially, the greatest challenge then is navigating potentially treacherous regulatory waters during the initial stages of a coin’s launch until it is widely traded.
Regulators have further indicated through past public statements that they generally pursue digital coins that are accused of much more than simply not registering as securities. There are often well-documented cases of fraud and abuse which necessitate an intervention to protect individual coin holders from potential harm. Regulators simply do not have enough resources to pursue and litigate every new unregistered crypto coin project, so they generally tend to focus on the most well known and/or potentially harmful of cases.
Again, those are generally the patterns of the current framework. Agencies are often changing their approach and even pursuing benign projects to bolster their image as protectors of the people. We see increasing enforcement actions after every financial calamity where the government appears to have not done its job of protecting people. This has been true following the Great Depression, the Great Recession and likely now after losses were incurred following the recent crash in meme stock values (caused by a halt in trading by zero-commission regulated trading apps).
The unique challenges of this uncertain environment suggest that legitimate crypto projects must be creative when it comes to finding ways to thrive and serve coin holders. Agencies often unfairly target them as part of their PR campaigns to regain public confidence. The message conveyed by recent events, such as the SEC enforcement against XRP, is that they want crypto projects to play by their rules and even when they do, they go after them (and use their compliance disclosures against them).
It is worth noting that regulatory enforcement actions are civil lawsuits and are not criminal in nature. Of course, one must obey the law and do unto others as one would have others do unto oneself. Yet, we see throughout history that great women and men have had to stand up to injustices that were considered norms in their times. Think about all those who sacrificed their freedom and lives in pursuit of the greater good of Humanity. People like Rosa Parks, Martin Luther King, Jr., Nelson Mandela and others who were mercilessly persecuted and smeared as law breakers for standing up to legal yet immoral societal norms. Where would we be now if not for their sacrifices?
Gandhi taught that civil disobedience can be a powerful tool of change during times of persecution. However, the reality is that while one is engaging in civil disobedience, the pain and oppression are often more intense. And yet, stopping mid-way is not an option. One must endure the challenge and persevere, as good ultimately prevails in the end.
(This is Part 1 of a two-part series.)